After increasing 3.2% in the third quarter year, the U.S. economy grew at a 2.9% annual rate in last year’s fourth quarter. The Federal Reserve’s preferred price index slowed to 3.2%. Inflation appears to be cooling, but labor, and supply chain challenges remain. Higher interest rates are impacting demand in manufacturing and services. The labor market remains tight. Unemployment is at 3.5%, matching a half-century low. Fourth quarter GDP reflected increases in inventory investment and consumer spending, partly offset by a decrease in housing. 

Whether the Federal Reserve can engineer a soft landing or not, a slowing economy will impact rail freight traffic demand. Rail freight volume growth is now projected to be less than 1% for 2023. Train speed velocity is a key metric that impacts equipment availability. Class One “Scheduled Railroading” operational plans will need to be adjusted to emphasize velocity improvements. Train crew shortages must be resolved. Both the Roads and Rail Shippers face higher new car pricing, driven by railcar production cost, steel and tight component availability. Car availability has tightened as railcar retirements have outpaced new deliveries for the third consecutive year1. Railcars in storage are down. Thirty-seven percent of the stored fleet has been inactive for over 1 year and will either be scrapped or repurposed if economically possible. Covered hoppers are being converted to from 3,250 to 4,751 cubic feet, allowing different product service such as potash, sugar, grain, and distillers dried grains. Suboptimal units in storage are likely to be scrapped. Tight equipment supply is supporting existing car pricing and lease renewal rates for both originations and renewals. 

Demand for air travel continues to outpace the industry’s ability to meet it. United, Delta, and American are all reporting resilient demand, seats packed and fares higher. Delayed new aircraft deliveries are restricting the industry’s ability to adequately respond to the rebound in passenger demand. At United’s January 18th earnings call, Scott Kirby, United’s chief executive, argued fundamental changes have occurred: “Across the board there are supply-chain constraints, technology infrastructure issues, a pilot shortage, workforce constraints (lower experience levels of new hires) and, airframers are struggling to meet delivery targets.” A logjam in engine repair capacity has left planes grounded as their engines are late coming out of overhaul. During last summer, more than 1,300 aircraft were returned to service from storage. Compared to pre-COVID levels more than 1,700 single-aisles and 900 twin-aisles remain in storage2. Detailed analysis of the stored single-aisle units project 60% are projected to return to service3

Yields on short-term Treasurys have held above those of longer-term debt, a signal to expect slowing growth. Globalization isn’t dead but changing. More attention is being paid to geoeconomic risk. Nations are balancing growth and low inflation against defending national interests. While the risk of a recession cannot be dismissed, the odds of a soft landing are getting better. With Covid receding, longer run issues are coming into focus. Prices are likely to go higher as constrained supply continues to drive equipment values and lease rates

Concerned about the path of demand and inflation? Call RESIDCO

Glenn Davis, 312-635-3161

[1] Greenbrier CEO Lorie Tekorius, Midwest Rail Shippers Winter Conference, 2023 Rail Equipment Update, January 18, 2023

[2] Cirium Fleets Analyzer, Western-built passenger jets, New Year Resolutions, January 26, 2023

[3] Ibid.

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